**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





**x**
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the Quarterly Period Ended December 31, 2005****o**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from ___________ to
                ___________****Commission
                file number: 0-27556**





**YOUTHSTREAM
      MEDIA NETWORKS, INC.**


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            
            **13-4082185**(State
                or other jurisdiction of
              incorporation
                of organization)
            
            (I.R.S.
                Employer
              Identification
                Number)**244
                Madison Avenue, PMB #358, New York, New York**
            
            **10016**(Address
                of principal executive offices)
            
            (Zip
                Code)**(212)
                883-0083**(Issuer’s
                telephone number, including area
                code)





Not
      applicable


---------------------------------------------------------------------------------------------------------


Former
      name, former address and former fiscal year, if changed since last
      report





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or such shorter period
      that
      the issuer was required to file such reports), and (2) has been subject to
      such
      filing requirements for the past 90 days. Yes o No x





As
      of
      August 18, 2006, the issuer had 39,242,251 shares of common stock, $0.01 par
      value, issued and outstanding.





Transitional
      Small Business Disclosure Format. Yes o No x





Documents
      incorporated by reference: None.
















**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**





The
      Company has elected to file a Quarterly Report on Form 10-QSB for the quarterly
      period ended December 31, 2005, as the Company qualifies as a Small Business
      Issuer in accordance with Regulation S-B. The Company intends to file subsequent
      periodic reports under Regulation S-B.





The
        statements included in this Quarterly Report on Form 10-QSB for the quarterly
        period ended December 31, 2005 (the “Report”) regarding future financial
        performance and results and other statements that are not historical facts
        constitute forward-looking statements. The words "believes," "intends,"
        "expects," "anticipates," "projects," "estimates," "predicts," and similar
        expressions are also intended to identify forward-looking statements. These
        forward-looking statements are based on current expectations and are subject
        to
        risks and uncertainties. In connection with the "safe harbor" provisions
        of the
        Private Securities Litigation Reform Act of 1995, the Company cautions the
        reader that actual results or events could differ materially from those set
        forth or implied by such forward-looking statements and related assumptions
        due
        to certain important factors, including, without limitation, the following:
        (i)
        cyclical changes in market supply and demand for steel, (ii) general economic
        conditions affecting steel consumption, (iii) U.S. or foreign trade policy
        affecting the price of imported steel, (iv) governmental monetary or fiscal
        policy in the U.S. and other major international economies, (v) increased
        price
        competition brought about by excess domestic and global steelmaking capacity
        and
        imports of low priced steel, (vi) continued consolidation in the domestic
        and
        global steel industry, resulting in larger producers with much greater market
        power to affect price and/or supply, (vii) changes in the availability or
        cost
        of steel scrap, which has risen dramatically over the past few years, (viii)
        periodic fluctuations in the availability and cost of electricity, natural
        gas
        or other utilities, (ix) the occurrence of unanticipated equipment failures
        and
        plant outages or the occurrences of extraordinary operating expenses, (x)
        competitive actions by the Company’s domestic and foreign competitors, (xi)
        margin squeeze or compression resulting from the Company’s inability to pass
        through to its customers, through price increases or surcharges, the increased
        cost of raw materials and supplies, (xii) loss of business from one or more
        major customers or end-users, (xiii) labor unrest, work stoppages and/or
        strikes
        involving the Company’s workforce, those of its important suppliers or
        customers, or those affecting the steel industry in general, (xiv) the effect
        of
        the elements upon the Company’s production or upon the production or needs of
        its important suppliers or customers, (xv) the impact of, or changes in,
        environmental laws or in the application of other legal or regulatory
        requirements upon the Company’s production processes or costs of production or
        upon those of its suppliers or customers, including actions by government
        agencies, such as the U.S. Environmental Protection Agency or the Kentucky
        Department for Environmental Protection, (xvi) private or governmental
        liability claims or litigation, or the impact of any adverse outcome of any
        litigation on the adequacy of the Company’s reserves, the availability or
        adequacy of its insurance coverage, its financial well-being or its business
        and
        assets, (xvii) changes in interest rates or other borrowing costs, or the
        effect
        of existing loan covenants or restrictions upon the cost or availability
        of
        credit to fund operations or take advantage of other business opportunities,
        (xviii) changes in the Company’s business strategies or development plans which
        it may adopt or which may be brought about in response to actions by its
        suppliers or customers, and any difficulty or inability to successfully
        consummate or implement as planned any planned or potential projects,
        acquisitions, joint ventures or strategic alliances; and (xix) the impact
        of
        regulatory or other governmental permits or approvals, litigation, construction
        delays, cost overruns, technology risk or operational complications upon
        the
        Company’s ability to complete, start-up or continue to profitably operate a
        project or a new business, or to complete, integrate and operate any potential
        acquisitions as anticipated. The Company is also subject to general business
        risks, including management's success in continuing to settle the Company's
        outstanding obligations from its prior business activities, results of tax
        audits, adverse state, federal or foreign legislation and regulation, changes
        in
        general economic factors, the Company's ability to retain and attract key
        employees, acts of war or global terrorism, and unexpected natural disasters
        .
        Any forward-looking statements included in this Report are made as of the
        date
        hereof, based on information available to the Company as of the date hereof,
        and, subject to applicable law, the Company assumes no obligation to update
        any
        forward-looking statements.









**INDEX**





**PART
                I—FINANCIAL INFORMATION**ITEM
                1.
            FINANCIAL
                STATEMENTSCondensed
                Consolidated Balance Sheets —
              December
                31, 2005 (Unaudited) and September 30, 2005
            1Condensed
                Consolidated Statements of Operations (Unaudited) —
              Three
                Months Ended December 31, 2005 and 2004
            3Condensed
                Consolidated Statement of Stockholders’ Deficiency (Unaudited) —
              Three
                Months Ended December 31, 2005
            4Condensed
                Consolidated Statements of Cash Flows (Unaudited) —
              Three
                Months Ended December 31, 2005 and 2004
            5Notes
                to Condensed Consolidated Financial Statements —
              Three
                Months Ended December 31, 2005 and 2004 (Unaudited)
            6ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            19ITEM
                3.
            CONTROLS
                AND PROCEDURES
            26**PART
                II—OTHER INFORMATION**ITEM
                1.
            LEGAL
                PROCEEDINGS
            33ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            33ITEM
                3.
            DEFAULTS UPON
              SENIOR
              SECURITIES
            33ITEM
                4.
            SUBMISSION
              OF MATTERS
              TO A VOTE OF SECURITY HOLDERS
            33ITEM
                5.
            OTHER INFORMATION
            33ITEM
                6.
            EXHIBITS
            33SIGNATURES
            34











**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**








**December
                31, 2005**
            
            **September
                30, 2005****(Unaudited)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            544,653
            
            $
            998,835Accounts
                receivable, less allowance for doubtful accounts of $804,207
                at
              December
                31, 2005 and $747,399 at September 30, 2005
            
            
            15,455,842
            
            
            14,668,539Inventories
            
            
            18,258,538
            
            
            17,880,805Prepaid
                expenses and other current assets
            
            
            2,236,484
            
            
            2,167,382Total
                current assets
            
            
            36,495,517
            
            
            35,715,561Property,
                plant and equipment
            
            
            6,630,012
            
            
            6,630,012Less
                accumulated depreciation and amortization
            
            
            (1,244,809
            )
            
            (1,062,267
            )Property,
                plant and equipment, net
            
            
            5,385,203
            
            
            5,567,745Other
                assets:Deferred
                loan costs, net of amortization of $522,652 at
              December
                31, 2005 and $438,913 at September 30, 2005
            
            
            339,174
            
            
            422,913Deposits
            
            
            216,035
            
            
            216,035Total
                other assets
            
            
            555,209
            
            
            638,948Total
                assets
            
            $
            42,435,929
            
            $
            41,922,254





(continued)




1




**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS****(continued)**








**December
                31, 2005**
            
            **September
                30, 2005****(Unaudited)**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            
            $
            10,115,861
            
            $
            9,008,612Accrued
                expenses
            
            
            2,502,059
            
            
            2,048,481Accrued
                interest payable:12%
                subordinated promissory notes payable to related parties
            
            
            1,297,479
            
            
            1,085,753Notes
                payable to directors
            
            
            ---
            
            
            50,000Secured
                line of credit
            
            
            15,878,828
            
            
            19,009,37912%
                subordinated promissory notes payable to related parties
            
            
            7,000,000
            
            
            ---Current
                portion of equipment contract payable
            
            
            78,902
            
            
            77,091Current
                portion of capital lease obligation
            
            
            386,391
            
            
            372,256Liabilities
                related to discontinued operations
            
            
            2,984,660
            
            
            2,984,660Total
                current liabilities
            
            
            40,244,180
            
            
            34,636,232Non-current
                liabilities:Accrued
                interest payable:4%
                note payable to investor
            
            
            117,419
            
            
            107,4198%
                subordinated promissory notes payable to related parties
            
            
            2,648,736
            
            
            1,852,3844%
                note payable to related party, plus cumulative interest of
                $952,775
            
            
            3,952,775
            
            
            3,952,7754%
                note payable to investor, net of unamortized discount
            
            
            965,079
            
            
            964,1948%
                subordinated secured promissory notes payable to related
                parties
            
            
            39,493,000
            
            
            39,493,00012%
                subordinated promissory notes payable to related parties
            
            
            ---
            
            
            7,000,000Equipment
                contract payable, less current portion
            
            
            152,285
            
            
            172,714Capital
                lease obligation, less current portion
            
            
            1,210,001
            
            
            1,312,064Deferred
                rent
            
            
            135,279
            
            
            144,360Preferred
                stock of subsidiary subject to mandatory redemption; issued and
                outstanding at December 31, 2005 - 25,000 shares, and at September
                30,
                2005 - 24,733 shares of Series A 13% cumulative, non-convertible,
                redeemable preferred stock, mandatory redemption and liquidation
                value of
                $1,000.00 per share, plus cumulative dividends of $2,724,658 at December
                31, 2005 and $1,885,129 at September 30, 2005
            
            
            27,724,658
            
            
            26,618,129Preferred
                stock subject to mandatory redemption; issued and outstanding at
                December
                31, 2005 and September 30, 2005 - 1,000,000 shares of Series A 4%
                cumulative, non-convertible, redeemable preferred stock, mandatory
                redemption and liquidation value of $4.00 per share, plus cumulative
                dividends of $1,269,333
            
            
            5,269,333
            
            
            5,269,333Minority
                interest - related parties
            
            
            ---
            
            
            ---Total
                liabilities
            
            
            121,912,745
            
            
            121,522,604Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, $0.01 par value; authorized - 5,000,000 shares; issued and
                outstanding at December 31, 2005 and September 30, 2005 - 1,000,000
                shares
                of Series A preferred stock (classified in long-term liabilities
                as
                preferred stock subject to mandatory redemption)
            
            
            ---
            
            
            ---Common
                stock, $0.01 par value; authorized - 100,000,000 shares; issued -
                39,849,751 shares; outstanding -39,242,251 shares at December 31,
                2005 and
                September 30, 2005
            
            
            398,486
            
            
            398,486Additional
                paid-in capital
            
            
            267,829,138
            
            
            268,096,138Accumulated
                deficit
            
            
            (346,874,864
            )
            
            (347,265,398
            )Treasury
                stock - 607,500 shares, at cost
            
            
            (829,576
            )
            
            (829,576
            )Total
                stockholders’ deficiency
            
            
            (79,476,816
            )
            
            (79,600,350
            )Total
                liabilities and stockholders’ deficiency
            
            $
            42,435,929
            
            $
            41,922,254




See
      accompanying notes to condensed consolidated financial statements.







2


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)**








**Three
                Months Ended**
              **December
                31,****2005**
            
            **2004**NET
                SALES
            
            $
            33,482,842
            
            $
            ---COSTS
                AND EXPENSESCost
                of sales
            
            
            28,875,532
            
            
            ---Selling
            
            
            385,571
            
            
            ---General
                and administrative
            
            
            1,341,429
            
            
            194,67130,602,532
            
            
            194,671Income
                (loss) from operations
            
            
            2,880,310
            
            
            (194,671
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            99
            
            
            14,365Interest
                expense:
              13%
                Series A Preferred Stock
            
            
            (839,528
            )
            
            ---Notes
                payable to related parties
            
            
            (1,008,078
            )
            
            ---Other
            
            
            (585,958
            )
            
            (10,572
            )Other
                income (expense), net
            
            
            6,689
            
            
            (17,738
            )Other
                income (expense), net
            
            
            (2,426,776
            )
            
            (13,945
            )INCOME
                (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
            
            
            453,534
            
            
            (208,616
            )Income
                taxes
            
            
            63,000
            
            
            ---INCOME
                (LOSS) BEFORE MINORITY INTEREST
            
            
            390,534
            
            
            (208,616
            )MINORITY
                INTEREST - related parties
            
            
            ---
            
            
            ---NET
                INCOME (LOSS)
            
            $
            390,534
            
            $
            (208,616
            )NET
                INCOME (LOSS) PER COMMON SHARE -Basic
            
            $
            0.01
            
            $
            (0.01
            )Diluted
            
            $
            0.01
            
            $
            (0.01
            )WEIGHTED
                AVERAGE NUMBER OF COMMONSHARES
                OUTSTANDING -
              Basic
            
            
            39,242,251
            
            
            39,242,251Diluted
            
            
            40,110,581
            
            
            39,242,251





See
      accompanying notes to condensed consolidated financial statements.


3


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
        (UNAUDITED)**
 **THREE
        MONTHS ENDED DECEMBER 31, 2005**










**Common
                Stock****Shares**
            
            
            **Amount**
            
            
            **Additional**
              **Paid-in**
              **Capital**
            
            
            **Accumulated**
              **Deficit**
            
            
            **Treasury**
              **Stock**
            
            
            **Total**Balances
                at October 1, 2005
            
            
            39,849,751
            
            $
            398,486
            
            $
            268,096,138
            
            $
            (347,265,398
            )
            $
            (829,576
            )
            $
            (79,600,350
            )Deemed
                distribution to sellers of KES Acquisition Company, LLC
            
            
            --
            
            
            --
            
            
            (267,000
            )
            
            --
            
            
            --
            
            
            (267,000
            )Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            390,534
            
            
            --
            
            
            390,534Balances
                at December 31, 2005
            
            
            39,849,751
            
            $
            398,486
            
            $
            267,829,138
            
            $
            (346,874,864
            )
            $
            (829,576
            )
            $
            (79,476,816
            )




See
        accompanying notes to condensed consolidated financial
        statements.







4


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**








**Three
                Months Ended**
              **December
                31,****2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            $390,534
            
            $
            (208,616
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Net
                change in liabilities related to discontinued operations
            
            
            ---
            
            
            (7,475
            )Depreciation
                and amortization
            
            
            182,542
            
            
            4,980Amortization
                of original issue discount on subordinated notes payable
            
            
            885
            
            
            572Amortization
                of deferred loan costs
            
            
            83,739
            
            
            ---Write-off
                of fixed assets
            
            
            ---
            
            
            20,429Changes
                in operating assets and liabilities:(Increase) decrease in -Accounts
                receivable, net
            
            
            (787,303
            )
            
            ---Inventories
            
            
            (377,733
            )
            
            ---Accrued
                interest receivable
            
            
            ---
            
            
            (11,647
            )Prepaid
                expenses
            
            
            (69,102
            )
            
            (11,181
            )Increase
                (decrease) in -Accounts
                payable
            
            
            1,107,249
            
            
            39,699Accrued
                interest and dividends payable
            
            
            1,857,607
            
            
            10,000Accrued
                expenses
            
            
            453,578
            
            
            (39,908
            )Deferred
                rent
            
            
            (9,081
            )
            
            ---NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            2,832,915
            
            
            (203,147
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPrincipal
                and interest payments on BTW note receivable
            
            
            ---
            
            
            247,227Deferred
                costs related to KES transaction
            
            
            ---
            
            
            (160,002
            )NET
                CASH PROVIDED BY INVESTING ACTIVITIES
            
            
            ---
            
            
            87,225CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                repayments under secured line of credit
            
            
            (3,130,551
            )
            
            ---Repayment
                of notes payable to directors
            
            
            (50,000
            )
            
            ---Principal
                payments on equipment contract payable and capital lease
                obligation
            
            
            (106,546
            )
            
            ---NET
                CASH USED IN FINANCING ACTIVITIES
            
            
            (3,287,097
            )
            
            ---CASH
                AND CASH EQUIVALENTSNet
                decrease
            
            
            (454,182
            )
            
            (115,922
            )Balance
                at beginning of period
            
            
            998,835
            
            
            674,880Balance
              at end of period
            
            $
            544,653
            
            $
            558,958SUPPLEMENTAL
                CASH FLOW INFORMATIONCash
                paid for -Interest
            
            $
            575,957
            
            $
            --Income
                taxes
            
            $
            --
            
            $
            --NON-CASH
                INVESTING AND FINANCING ACTIVITIESDeemed
                distribution to sellers of KES Acquisition Company, LLC
            
            $
            267,000
            
            $
            --


See
      accompanying notes to condensed consolidated financial statements.





5




**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)**


**THREE
      MONTHS ENDED DECEMBER 31, 2005 AND 2004**








**1.
      Organization and Basis of Presentation**





Basis
      of
      Presentation





The
      accompanying consolidated financial statements include the accounts of
      YouthStream Media Networks, Inc. (“YouthStream”), and its direct and
      indirect wholly and majority-owned subsidiaries: Network Event
      Theater, Inc. (“NET”), American Passage Media, Inc. (“American
      Passage”), Beyond the Wall, Inc. (“Beyond the Wall” or “BTW”), and
      W3T.com, Inc. (“Teen.com”) (all inactive); and, commencing March 1, 2005,
      YouthStream Acquisition Corp. (“Acquisition Corp.”), Atacama KES Holding
      Corporation (“Atacama KES”) and KES Acquisition Company, LLC (“KES Acquisition”)
      (see Note 2) (collectively, the “Company”).





The
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in the United States of
      America. All
      intercompany items and transactions have been eliminated in
      consolidation.





Commencing
      March 1, 2005, the Company has included the operations of a steel mini-mill
      located in Ashland, Kentucky in its consolidated financial statements (see
      Note
      2), which represents the only business segment in which the Company currently
      operates.





The
      accompanying condensed consolidated financial statements are unaudited, but
      in
      the opinion of management of the Company, contain all adjustments, which include
      normal recurring accruals, necessary to present fairly the financial position
      at
      December 31, 2005, the results of operations for the three months ended December
      31, 2005 and 2004, and the cash flows for the three months ended December 31,
      2005 and 2004. The balance sheet as of September 30, 2005 is derived from the
      Company’s audited financial statements included in the Company’s Annual Report
      on Form 10-KSB for the fiscal year ended September 30, 2005.





Certain
      information and footnote disclosures normally included in financial statements
      that have been prepared in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission, although management of the Company
      believes that the disclosures contained in these financial statements are
      adequate to make the information presented therein not misleading. For further
      information, refer to the financial statements and the notes thereto included
      in
      the Company’s Annual Report on Form 10-KSB for the fiscal year ended September
      30, 2005, as filed with the Securities and Exchange Commission.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities at the date of
      the
      financial statements, and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those
      estimates.





The
      results of operations for the three months ended December 31, 2005 are not
      necessarily indicative of the results of operations to be expected for the
      full
      fiscal year ending September 30, 2006.





Going
      Concern





The
      Company has incurred recurring operating losses since its inception. The
      Company incurred
      a net loss of $3,430,562 and a negative cash flow from operating activities
      of
      $4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
      of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
      30,
      2005. As
      of
      September 30, 2005, the Company had insufficient capital to fund all of its
      obligations on a consolidated basis. These factors raise substantial doubt
      about
      the Company’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments to reflect the possible future effect
      of the recoverability and classification of assets or the amounts and
      classifications of liabilities that may result from the outcome of this
      uncertainty.





6


On
      March
      9, 2005, the Company completed the acquisition of a steel mini-mill located
      in
      Ashland, Kentucky (see Note 3). The Company utilized substantially all of its
      available cash resources to fund such acquisition and will require additional
      operating capital to fund corporate general and administrative expenses, which
      the Company expects to obtain primarily through periodic tax sharing payments
      from Acquisition Corp. and Atacama KES (see Note 3). In addition, the steel
      mini-mill restarted operations in late January 2004 after being acquired by
      the
      previous owners, and until recently has incurred losses. For the year ended
      September 30, 2005, operating income was $2,691,955 (which included the
      operations of the steel mini-mill for the seven month period March through
      September 2005), exclusive of interest expense. For the three months ended
      December 31, 2005, operating income was $2,880,310, exclusive of interest
      expense. The steel mini-mill relies on cash flows from operations to support
      a
      secured line of credit with General Electric Capital Corporation to fund its
      separate operations. As a result of improved operating performance of the steel
      mini-mill beginning in late 2005, the Company has been able to increase
      borrowing availability under this line of credit.





Based
      on
      its current level of operations, the Company believes that its current cash
      resources provided by operations and the secured line of credit will be adequate
      to fund its operations through September 30, 2006. However, to the extent the
      Company’s estimates are inaccurate or its assumptions are incorrect, the Company
      may not have sufficient cash resources to fund its operations. In such event,
      the Company may have to consider a formal or informal restructuring or
      reorganization, including a sale or other disposition of its
      assets.





The
      Company’s management may also consider various strategic alternatives in the
      future, including the acquisition of new business opportunities, which may
      be
      from related or unrelated parties.  However, there can be no assurances
      that such efforts will ultimately be successful.  The Company may finance
      any acquisitions through a combination of debt and/or equity
      securities.





Stock-Based
      Compensation





The
      Company accounts for stock-based employee compensation in accordance with the
      provisions of Accounting Principles Board (“APB”) Opinion No. 25 and FASB
      Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions
      Involving Stock Compensation”, and complies with the disclosure requirements of
      SFAS No. 123 (as modified by SFAS No. 48), “Accounting for Stock-Based
      Compensation”. Under APB No. 25, compensation expense is recorded based on
      the difference, if any, between the fair value of the Company’s stock and the
      exercise price on the measurement date. The Company accounts for stock issued
      to
      non-employees in accordance with SFAS No. 123, which requires entities to
      recognize as expense over the service period the fair value of all stock-based
      awards on the date of grant and EITF No. 96-18, “Accounting for Equity
      Investments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services”, which addresses the measurement
      date and recognition approach for such transactions.




The
      Company recognizes compensation expense related to variable awards in accordance
      with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights
      and Other Variable Stock Option or Award Plans” (“FIN 28”). For fixed awards,
      the Company recognizes expense over the vesting period or the period of
      service.




In
      December 2004, the Financial Accounting Standards Board
      (“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment”
(“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for
      Stock-Based Compensation”. SFAS No. 123R supersedes Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
      amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires
      that the Company measure the cost of employee services received in exchange
      for
      equity awards based on the grant date fair value of the awards. The cost will
      be
      recognized as compensation expense over the vesting period of the awards. The
      Company was required to adopt SFAS No. 123R effective January 1,
      2006. Under this method, the Company will begin recognizing compensation cost
      for equity-based compensation for all new or modified grants after the date
      of
      adoption. The pro forma disclosures previously permitted under SFAS No. 123
      will no longer be an alternative to financial statement recognition. In
      addition, the Company will recognize the unvested portion of the grant date
      fair
      value of awards issued prior to adoption based on the fair values previously
      calculated for disclosure purposes over the remaining vesting period of the
      outstanding options and warrants.




7


The
      Company will adopt SFAS No. 123R effective January 1, 2006 and will
      use the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS
      No. 123R for all share-based payments granted after the effective date and
      (b) based on the requirements of SFAS No. 123R for all awards granted
      to employees prior to the effective date of SFAS No. 123R that remain
      unvested on the effective date. Although the expense for stock options that
      may be vested or granted in future periods cannot be determined at this
      time due to the uncertainty of the vesting or timing of future grants, the
      Company’s future stock price, and the related fair value calculation, the
      adoption of SFAS No. 123R could have a material effect on the Company’s
      future financial statements.





Pro
      forma
      information regarding net income (loss) per share is required by SFAS No. 123
      as
      if the Company had accounted for its employee stock options and warrants under
      the fair value method of such statement. However, since the Company did not
      issue or have outstanding any unvested stock options or warrants to officers,
      directors and employees that vested during the three months ended December
      31,
      2005 and 2004, no pro forma financial disclosure has been presented for such
      periods.





Earnings
      Per Share





The
      Company calculates net income (loss) per share as required by SFAS No. 128,
      "Earnings per Share". Basic earnings per share excludes any dilution for common
      stock equivalents and is computed by dividing net income (loss) by the weighted
      average number of common shares outstanding during the relevant period. Diluted
      earnings per share reflects the potential dilution that could occur if options
      or other securities or contracts entitling the holder to acquire shares of
      common stock were exercised or converted, resulting in the issuance of
      additional shares of common stock that would then share in earnings. However,
      diluted earnings per share does not consider such dilution if its effect would
      be anti- dilutive.





At
      December 31, 2005 and 2004, potentially dilutive securities entitling the holder
      thereof to acquire shares of common stock are summarized as
      follows:





**2005**
            
            **2004**Stock
                options
            
            
            1,405,404
            
            
            1,205,404Common
                stock purchase warrants
            
            
            1,000,000
            
            
            1,000,000





Concentrations





The
      Company’s cash balances exceeded federally-insured levels at December 31, 2005
      and September 30, 2005. The Company minimizes its credit risk by investing
      its
      cash and cash equivalents with major banks and financial institutions located
      in
      the United States, as a result of which the Company believes that it had nominal
      risk with respect to its concentration of balances in cash and cash equivalents
      at such date.





During
      the three months ended December 31, 2005, the Company had two suppliers that
      accounted for approximately 48% of raw materials purchases, one supplier
      providing approximately 35% and the other supplier providing approximately
      13%,
      of which $2,204,497 was included in accounts payable at December 31, 2005.
      During the three months ended December 31, 2005, the Company had two customers
      that accounted for approximately 19% of net sales, one customer providing
      approximately 12% and the other customer providing approximately 7%, of which
      $3,702,710 was included in accounts receivable at December 31,
      2005.





Discontinued
      Operations





As
      of
      December 31, 2005 and September 30, 2005, the Company has accrued liabilities
      $2,984,660 remaining from its discontinued businesses. The accrued liabilities
      consist primarily of severance, lease payments and other costs related to the
      operations of the discontinued businesses.





8


Recent
      Accounting Pronouncements and Developments





In
      May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).
      SFAS No. 154 is a replacement of APB Opinion No. 20, “Accounting
      Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements - (an Amendment of APB Opinion No. 28)” and provides guidance on
      the accounting for and reporting of accounting changes and error corrections.
      SFAS No. 154 establishes retrospective application as the required method
      for reporting a change in accounting principle, and provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. Retrospective application is the application
      of a
      different accounting principle to a prior accounting period as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. SFAS No. 154 also
      addresses the reporting of the correction of an error by restating previously
      issued financial statements. SFAS No. 154 is effective for accounting
      changes and error corrections occurring in fiscal years beginning after
      December 15, 2005. The adoption of SFAS No. 154 is not expected to have any
      impact on the Company’s financial statement presentation or
      disclosures.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that has an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





On
      September 22, 2005, the Securities and Exchange Commission ("SEC") issued rules
      to delay by one year the required reporting by management on internal controls
      over financial reporting for non-accelerated filers. The new SEC rule extends
      the compliance date for such registrants to fiscal years ending on or after
      July
      15, 2007. Accordingly, the Company qualifies for the deferral until its fiscal
      year ending September 30, 2007 to comply with the internal control reporting
      requirements. On August 9, 2006, the SEC issued two releases that when adopted
      are designed to grant smaller public companies further relief from compliance
      with Section 404 of the Sarbanes-Oxley Act of 2002.





**2.
      Acquisition of Steel Mini-Mill**





In
      September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
      interest in KES Holdings, LLC, a Delaware limited liability company ("KES
      Holdings"), which was formed to acquire certain assets of Kentucky Electric
      Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
      mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
      KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
      limited liability company ("KES Acquisition"), completed the acquisition of
      the
      Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
      consideration of $2,650,000, which was funded through the capital contributions
      of the members of KES Holdings. Members’ capital contributions were also used
      for start-up costs, working capital purposes and payment of deferred maintenance
      of the Mill. KES had ceased production on or about December 16, 2002 and
      filed a voluntary petition for relief under Chapter 11 of the United States
      Bankruptcy Code on February 5, 2003.





The
      Mill
      had been in operation for approximately forty years and was refurbished by
      KES
      Acquisition subsequent to its acquisition.  The refurbished Mill has been
      generating revenues since late January 2004. The current production capacity
      of
      the Mill for finished products, based on the current operating structure and
      man-hours worked, is approximately 200,000 short-tons per year, and the Mill
      is
      currently operating at approximately 100% of such annualized
      capacity.  Management
      is focusing on developing the business and improving operating
      efficiencies.





The
      Mill
      produces bar flats that are produced to a variety of specifications and fall
      primarily into two general quality levels - merchant bar quality steel bar
      flats
      (“MBQ Bar Flats”) for generic types of applications, and special bar quality
      steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
      require the use of alloys, customized equipment and special production
      procedures to insure that the finished product meets critical end-use
      performance characteristics.





9


The
      Mill
      manufactures over 2,600 different Bar Flat items which are sold to volume niche
      markets, including original equipment manufacturers (“OEMs”), cold drawn bar
      converters, steel service centers and the leaf-spring suspension market for
      light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
      specifically designed to manufacture wider and thicker bar flats up to three
      inches in thickness and twelve inches in width that are required by these
      markets. In addition, the Mill employs a variety of specially designed equipment
      which is necessary to manufacture SBQ Bar Flats to the specifications of the
      Mill’s customers.





On
      March
      9, 2005, YouthStream completed the acquisition of KES Acquisition (the
      "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
      agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
      British Virgin Islands company ("Atacama", and together with KES Holdings,
      collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
      YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
      acquired 100% of the membership interests of KES Acquisition by acquiring (i)
      a
      37.45% membership interest from KES Holdings and (ii) all of the capital stock
      of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
      (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
      Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
      to
      the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
      shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-Voting Common Stock. With respect
      to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
      $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
      and
      $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
      were issued to Atacama. YouthStream also contributed an aggregate of $500,000
      of
      cash to Acquisition Corp. as consideration for the issuance by Acquisition
      Corp.
      of 100% of its Series A Voting Common Stock. In addition, YouthStream will
      periodically be required to purchase shares of Series B Preferred Stock of
      Acquisition Corp. in amounts equal to distributions it receives on its KES
      Holdings membership interest.





As
      a
      result of these transactions, YouthStream owns 80.01% of the common stock,
      and
      100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
      stock
      interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
      Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
      (this percentage has increased from 1.00% as a result of the redemption of
      another member’s interest), as a result of which the Company has eliminated its
      $507,000 equity interest in the Notes and $267,000 equity interest in the 13%
      Series A Preferred Stock in the consolidated balance sheet at September 30,
      2005, and its $507,000 equity interest in the Notes and $0 equity interest
      in
      the 13% Series A Preferred Stock in the consolidated balance sheet at December
      31, 2005 (see Note 6). YouthStream has consolidated the operations of the Mill
      through its ownership of KES Acquisition commencing March 1, 2005. As a result
      of the Acquisition, the Company’s financial statements for periods ending after
      March 1, 2005 are materially different from and are not comparable to its
      financial statements prior to that date.





Subsequent
      to this transaction, the management of the Mill continued unchanged. This
      transaction did not result in any change in the Mill’s business operations or
      financial condition, and, other than as set forth herein, the working capital,
      operating cash flow, debt service obligations and credit profile of the Mill
      were not affected in any way by this transaction.





As
      described herein, the Notes and 13% Series A Preferred Stock were issued by
      Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
      a
      separate legal entity that owns and operates the Mill. The Notes are legal
      obligations solely of Acquisition Corp., and are not obligations of KES
      Acquisition, nor are they secured by the assets or cash flows of the Mill.
      In
      the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
      upon the consent of any senior lender to KES Acquisition at that time. In
      addition, the Notes are non-recourse to the assets of YouthStream, except for
      the shares of capital stock of Acquisition Corp. that have been pledged by
      YouthStream to the holders of the Notes. Pursuant to the terms of the
      transaction documentation in connection with the Acquisition and the loan
      facility with General Electric Capital Corporation (“GECC”), YouthStream and
      Acquisition Corp. are currently limited in their ability to receive cash
      distributions from KES Acquisition, but are permitted to receive tax sharing
      payments as described below. Any change in control of Acquisition Corp. in
      the
      future as a result of the holders of the Notes exercising their legal rights
      would not reasonably be expected to have a material impact on the operations
      or
      financial position of the Mill.




10


The
      Notes
      are structurally subordinate in right and payment of up to $40,000,000 of senior
      debt, including existing debt obligations in favor of GECC. Scheduled principal
      payments commence in (i) February 2007 with respect to the $19,000,000 principal
      amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
      respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
      In addition, the Notes require additional quarterly principal payments out
      of
      "free cash", as that term is defined in the Note Purchase Agreement. The Notes
      bear interest at the rate of 8% per annum, payable annually during the first
      two
      years of the Note, as provided for in a letter agreement dated as of July 14,
      2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
      the Note holders, and quarterly thereafter. The obligations of Acquisition
      Corp.
      under the Notes are secured by a limited guaranty by YouthStream, which guaranty
      is secured by and limited in recourse solely to a pledge by YouthStream of
      all
      of its interest in Acquisition Corp. As of September 30, 2005, the balance
      outstanding on the Notes was $39,493,000, and related accrued interest payable
      was $1,852,384. As of December 31, 2005, the balance outstanding on the notes
      was $39,493,000 and the related accrued interest payable was $2,648,736.





Future
      scheduled principal payments on the Notes are summarized as
      follows:





**KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**Years
                Ending September 30,2006
            
            $
            ---
            
            $
            ---2007
            
            
            1,900,000
            
            
            ---2008
            
            
            950,000
            
            
            ---2009
            
            
            950,000
            
            
            ---2010
            
            
            950,000
            
            
            ---2011
            
            
            2,850,000
            
            
            4,200,0002012
            
            
            2,850,000
            
            
            4,200,0002013
            
            
            2,850,000
            
            
            4,200,0002014
            
            
            ---
            
            
            1,264,0002015
            
            
            5,700,000
            
            
            7,136,000Total
            
            $
            19,000,000
            
            $
            21,000,000





Pursuant
      to a further letter agreement dated April 11, 2006 and effective as of February
      27, 2006 by and among Acquisition Corp. and the Note holders, the interest
      payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
      short-term notes due February 27, 2007 in the principal amount of $3,200,000,
      with interest at 8% per annum.





For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES were collectively required to have, on a consolidated basis, in
      excess of $4,000,000 of earnings before interest, taxes, depreciation and
      amortization, calculated in accordance with generally accepted accounting
      principles ("EBITDA").  For each of the fiscal years ending on and
      after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
      are
      collectively required to have, on a consolidated basis, in excess of $7,200,000
      of EBITDA.  At March 31 of each fiscal year following the fiscal year
      ending September 30, 2005 in which the obligations under the Notes remain
      outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
      required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
      for
      the six months then ended. Effective September 23, 2005, the holders of the
      Notes executed an agreement to amend the Notes to eliminate the requirement
      that
      Acquisition Corp., KES Acquisition and Atacama KES collectively have, on a
      consolidated basis, in excess of $4,000,000 of EBITDA for the nine months ending
      September 30, 2005.




11


The
      holders of each share of 13% Series A Preferred Stock are entitled to receive
      a
      cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
      accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
      liquidation preference equal to $1,000 per share, plus accrued but unpaid
      dividends, and is redeemable out of, and to the extent of, legally available
      funds, at a redemption price equal to the sum of $1,000 and all accrued but
      unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
      Corp., (ii) the occurrence of an event of default under the Note Purchase
      Agreement pursuant to which the Notes were issued or (iii) the first anniversary
      of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
      beginning with the second anniversary of the initial issuance of the 13% Series
      A Preferred Stock, Acquisition Corp. will be required to use "free cash", as
      that term is defined in the Securities Purchase Agreement, to commence redeeming
      shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
      with limited exceptions. As of September 30, 2005, the balance outstanding
      on
      the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
      payable were $1,885,129. As of December 31, 2005, the balance outstanding on
      the
      13% Series A Preferred Stock was $25,000,000 and related accrued dividends
      payable were $2,724,658.





Since
      the
      acquisition of the Mill by the Sellers, the Mill has been operating under a
      Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
      Agreement"), which agreement remained in effect following the closing. The
      principals of Pinnacle Steel LLC that manage the Mill have significant
      experience and expertise in the steel industry. The Pinnacle Agreement will
      remain in effect through October 31, 2009, subject to earlier termination or
      extension based on the financial performance of the Mill. Pinnacle is entitled
      to a monthly management fee and a management incentive fee as provided in the
      Pinnacle Agreement.





Subsequent
      to the acquisition of the Mill by the Sellers, KES Acquisition issued an
      aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
      certain of their respective affiliates (the “Subordinated Promissory Notes”).
      The proceeds from the Subordinated Promissory Notes were used to accelerate
      the
      development and expansion of the Mill’s operations. The Subordinated Promissory
      Notes bear interest at the rate of 12% per annum, with interest payable monthly,
      subject to compliance with various agreements and covenants, are secured by
      a
      subordinated security interest in all of the assets of KES Acquisition, and
      are
      subject to an Intercreditor and Subordination Agreement dated March 24, 2004
      with GECC. When originally issued, principal and interest were due and payable
      upon the earlier to occur of (i) an event of default under the Loan and Security
      Agreement with GECC or (ii) each note’s respective due date, which ranged from
      March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
      of
      the notes had all been extended to December 31, 2006, if not repaid earlier.
      At
      September 30, 2005, accrued interest payable with respect to the Subordinated
      Promissory Notes was $1,085,753. At December 31, 2005, accrued interest payable
      with respect to the Subordinated Promissory Notes was $1,297,479.




Related
      parties with respect to this transaction are summarized as follows: Robert
      Scott
      Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G. Byer,
      another director of YouthStream, is an employee of affiliates of Libra/KES
      Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
      economic interest in KES Holdings through his relationship with Libra
      Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
      effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
      of
      Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
      his
      family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
      either directly or through the Ravich Trust, holds 1,860,000 shares of
      YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
      common stock exercisable through August 31, 2008, 1,000,000 shares of
      YouthStream's redeemable preferred stock and an option to purchase 200,000
      shares of YouthStream’s common stock exercisable through June 26, 2013, which
      was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
      connection with his election to the Board of Directors. Through his positions
      at
      Libra/KES, Mr. Ravich managed the business of KES Acquisition through February
      28, 2005. Subordinated Promissory Notes with a principal amount of $1,650,000
      and $450,000 are payable to the Ravich Trust and Libra Securities Holdings,
      LLC, the parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have
      each previously acquired an option from the Ravich Trust for $2,500 ($0.04
      per
      share) to purchase 62,500 shares of YouthStream's redeemable preferred stock
      issued to the Ravich Trust in January 2003, exercisable at $0.36 per share
      until
      December 31, 2006 or earlier upon the occurrence of certain events.





The
      Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
      “Business Combinations”, and in accordance with Emerging Issues Task Force
      (EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
      substantial and continuing relationships between YouthStream and the Sellers,
      and the provisions of EITF 88-16 that are required to be considered when
      determining the extent of fair value/predecessor basis to be used in recording
      the transaction, the Acquisition has been recorded at predecessor basis. Since
      the debt and equity held by the Sellers represented almost the entire amount
      of
      capital at risk both before and after the Acquisition, the application of the
      “monetary test” specified in Section 3 of EITF 88-16, which limits the portion
      of the purchase consideration that can be valued at fair value to the percentage
      of the total consideration that is monetary, was utilized by the Company in
      determining to record the transaction at predecessor basis. The excess of the
      purchase price over predecessor basis of the net assets acquired has been
      reflected as a deemed distribution of $63,104,423 to the Sellers at the date
      of
      acquisition in the consolidated financial statements.





12


For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES are included in the consolidated federal income tax return filed by
      YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
      entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
      have agreed to pay YouthStream an amount equal to 50% of their respective
      "separate company tax liability", subject to compliance with the GECC secured
      line of credit.  The term "separate company tax liability" is defined as
      the amount, if any, of the federal income tax liability (including, without
      limitation, liability for any penalty, fine, additions to tax, interest, minimum
      tax and other items applicable to such subsidiary in connection with the
      determination of the subsidiary's tax liability), which such subsidiary
      would have incurred if its federal income tax liability for the periods during
      which it is includible in a consolidated federal income tax return with
      YouthStream were determined generally in the same manner in which its
      separate return liability would have been calculated under Section 1552(a)(2)
      of
      the Internal Revenue Code of 1986, as amended.  YouthStream has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset the consolidated federal taxable income of the affiliated
      group in the future.





The
      total
      purchase price of $65,000,000, as well as the terms and conditions of the Notes
      and 13% Series A Preferred Stock issued to the Sellers, was determined to be
      at
      fair value based on reports prepared by an independent valuation firm.





The
      following is a summary of the assets acquired and liabilities assumed at
      predecessor basis at February 28, 2005.





Assets
                Acquired:Cash
            
            $
            913,194Accounts
                receivable
            
            
            10,781,836Allowance
                for doubtful accounts
            
            
            (328,351
            )Inventories
            
            
            18,762,218Prepaid
                expenses and other current assets
            
            
            904,271Property,
                plant and equipment
            
            
            6,630,012Accumulated
                depreciation and amortization
            
            
            (639,254
            )Due
                from YouthStream Acquisition Corp.
            
            
            187,702Other
                non-current assets
            
            
            721,393Total
                assets acquired
            
            
            37,933,021





Liabilities
                Assumed:Accounts
                payable
            
            
            9,566,327Accrued
                expenses
            
            
            1,267,016Accrued
                interest payable
            
            
            593,260Deferred
                rent
            
            
            165,413Subordinated
                promissory notes payable
            
            
            7,000,000Line
                of credit
            
            
            15,495,095Equipment
                contract payable
            
            
            291,223Capital
                lease obligation
            
            
            1,877,179Total
                liabilities assumed
            
            
            36,255,513Net
                assets acquired
            
            
            1,677,508Adjustment
                to recognize minority interest
            
            
            (331,981
            )$
            1,345,527Total
                purchase consideration, net of intercompany eliminations of 2.67%
                interest
                held by KES Holdings:8%
                Subordinated secured promissory notes payable
            
            $
            39,493,00013%
                Series A preferred stock
            
            
            24,733,000Net
                purchase consideration
            
            
            64,226,000Minority
                interests in equity
            
            
            223,950Adjustment
                to record deemed distribution to Sellers
            
            
            (63,104,423
            )$
            1,345,527




13







The
      amount due from YouthStream Acquisition Corp. of $187,702 represents costs
      incurred by KES Acquisition with respect to the Acquisition, which were included
      in the $1,171,406 of transaction costs related to the Acquisition charged to
      operations during the year ended September 30, 2005.





As
      of
      September 30, 2004, the Company had incurred $175,144 of costs with respect
      to
      the Acquisition, which were presented as deferred costs in the Company’s
      consolidated balance sheet at such date. These costs were included in the
      $1,171,406 of transaction costs related to the Acquisition charged to operations
      during the year ended September 30, 2005.





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months ended December 31, 2005, net income allocable
      to
      the 19.99% minority shareholders was $37,526.





The
      following pro forma operating data shown below presents the results of
      operations for the three months ended December 31, 2004, as if the Acquisition
      had occurred on the last day of the immediately preceding fiscal period.
      Accordingly, transaction costs related to the Acquisition are not included
      in
      the net loss from continuing operations shown below. The Mill commenced
      generating revenues in late January 2004. The pro forma results are not
      necessarily indicative of the financial results that might have occurred had
      the
      Acquisition actually taken place on the respective dates, or of future results
      of operations. P ro
      forma
      information for the three months ended December 31, 2004 is summarized as
      follows:


Net
                  sales
              
              $
              27,487,729Cost
                  of sales
              
              
              25,760,188Gross
                  margin
              
              
              1,727,541Operating
                  income
              
              
              381,860Interest
                  expense
              
              
              (2,361,442
              )Minority
                  interest
              
              
              199,109Net
                  loss from continuing operations
              
              $
              (1,696,846
              )Basic
                  and diluted net loss per common share
              
              $
              (0.04
              )Weighted
                  average common shares outstanding
              
              
              39,242,251





Almost
      all of the Company's net assets are owned by KES Acquisition, a consolidated
      subsidiary.  As a result of various contractual restrictions contained in
      various financing agreements (as previously described) and documents relating
      to
      the Acquisition, there are limits on the Company’s ability to transfer assets
      from KES Acquisition to Youthstream, whether in the form of loans and advances,
      cash dividends, tax-sharing payments, or otherwise, without notice to and/or
      consent of one or more third parties.





14


A
      summary
      of the Company's restricted and unrestricted assets, liabilities and equity
      at
      December 31, 2005 and at September 30, 2005 is presented below.




December
                31, 2005
            
            
            Unrestricted
            
            
            Restricted
            
            
            As
                ReportedCurrent
                assets
            
            $
            500,540
            
            $
            35,994,977
            
            $
            36,495,517Property,
                plant and equipment, net
            
            
            -
            
            
            5,385,203
            
            
            5,385,203Other
                assets
            
            
            -
            
            
            555,209
            
            
            555,209Total
                assets
            
            $
            500,540
            
            $
            41,935,389
            
            $
            42,435,929Current
                liabilities
            
            $
            3,908,112
            
            $
            36,336,068
            
            $
            40,244,180Non-current
                liabilities
            
            
            80,171,000
            
            
            1,497,565
            
            
            81,668,565Equity:Retained
                earnings (accumulated deficit)
            
            
            (349,937,425
            )
            
            3,062,561
            
            
            (346,874,864
            )Other
            
            
            266,358,853
            
            
            1,039,195
            
            
            267,398,048Total
                liabilities and equity
            
            $
            500,540
            
            $
            41,935,389
            
            $
            42,435,929




September
                30, 2005
            
            Unrestricted
            
            Restricted
            
            As
                ReportedCurrent
                assets
            
            $
            261,740
            
            $
            35,453,821
            
            $
            35,715,561Property,
                plant and equipment, net
            
            
            -
            
            
            5,567,745
            
            
            5,567,745Other
                assets
            
            
            -
            
            
            638,948
            
            
            638,948Total
                assets
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254Current
                liabilities
            
            $
            4,224,995
            
            $
            30,411,237
            
            $
            34,636,232Non-current
                liabilities
            
            
            78,257,234
            
            
            8,629,138
            
            
            86,886,372Equity:Retained
                earnings (accumulated deficit)
            
            
            (348,435,183
            )
            
            1,169,785
            
            
            (347,265,398
            )Other
            
            
            266,214,694
            
            
            1,450,354
            
            
            267,665,048Total
                liabilities and equity
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254








**3.
      Inventories**





Inventories
      are comprised of the following at December 31, 2005 and September 30,
      2005:





December
                31,
              2005
            
            September
                30,
              2005(Unaudited)Raw
                materials and scrap
            
            $
            2,947,430
            
            $
            2,954,405Semi-finished
                goods
            
            
            5,611,786
            
            
            6,556,006Finished
                goods
            
            
            9,699,322
            
            
            8,370,394Total
            
            $
            18,258,538
            
            $
            17,880,805





Inventories
      are comprised of raw materials (consisting of billets and scrap metal),
      semi-finished goods and finished goods. Inventory costs include material, labor
      and manufacturing overhead. Inventories are valued at the lower of average
      cost
      or market. The average cost of the billets and scrap metal is adjusted
      periodically to reflect current changes in cost inputs.





15


**4.
      Notes Payable and Long-Term Debt**





**Notes
      Payable to Related Parties**





During
      September 2005, the Company borrowed $50,000 from certain directors under
      short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
      to fund corporate general and administrative expenses. The notes were subject
      to
      mandatory prepayment based on any proceeds received by the Company from, among
      other sources, the note that the Company received in February 2004 from the
      sale
      of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
      any
      tax sharing payments received under the Tax Sharing Agreement with Acquisition
      Corp. and Atacama KES (see Note 2). On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable from the sale of the
      assets and operations of Beyond the Wall, Inc., and repaid the notes payable
      to
      directors in October 2005.





**Subordinated
      Secured Promissory Notes Payable to Related Parties**





Subordinated
      secured promissory notes payable consist of seven notes payable aggregating
      $7,000,000 issued by KES Acquisition to three related parties. The proceeds
      from
      these notes were used to accelerate the development and expansion of the steel
      mini-mill’s operations prior to its acquisition by the Company. The notes bear
      interest at 12% per annum, with interest payable monthly, subject to compliance
      with various agreements and covenants, are secured by a subordinated security
      interest in all of the assets of KES Acquisition, and are subject to an
      Intercreditor and Subordination Agreement dated March 24, 2004 with GECC. When
      originally issued, principal and interest were due and payable upon the earlier
      to occur of (i) an event of default under the Loan and Security Agreement with
      GECC or (ii) each note’s respective due date, which ranged from March 31, 2005
      to December 31, 2005. As of September 30, 2005, the due dates of the notes
      had
      all been extended to December 31, 2006, if not repaid earlier. At December
      31,
      2005 and September 30, 2005, accrued interest payable with respect to the
      subordinated secured promissory notes payable was $1,297,479 and $1,085,753,
      respectively.





**Secured
      Line of Credit**





Effective
      March 24, 2004, KES Acquisition entered into a loan and security agreement,
      as
      amended, with GECC. Under the terms of the agreement, KES Acquisition has the
      ability to borrow up to $23,000,000, subject to limitations under the lender’s
      borrowing base formula and compliance with a minimum fixed charge coverage
      ratio. Interest is payable monthly in arrears on the outstanding principal
      balance at the index rate (defined as the thirty-day dealer commercial paper
      rate) plus 5.5% per annum. The line of credit matures on March 24, 2007, and
      is
      secured by all of the assets of KES Acquisition and a pledge of (i) the
      membership interests of KES Acquisition owned by Acquisition Corp. and (ii)
      the
      capital stock of Atacama KES owned by Acquisition Corp. As of December 31,
      2005
      and September 30, 2005, the balance outstanding on the line of credit was
      $15,878,828 and $19,009,379, respectively, which has been presented as a current
      liability in the consolidated balance sheet at such date due to the collateral
      securing such line of credit consisting primarily of current assets and the
      continuing uncertainty with respect to the Company’s ability to maintain
      compliance under the terms and conditions of the line of credit.





At
      March
      31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
      ratio based on its consolidated financial statements as originally filed, in
      part relating to changes to its accounting procedures as a result of the review
      of its financial statements conducted in conjunction with its acquisition by
      YouthStream (see Note 2), and subsequently received a waiver of default from
      the
      lender. At June 30, 2005, KES Acquisition was in compliance with the fixed
      charge coverage ratio based on its consolidated financial statements as
      originally filed. However, KES Acquisition was not in compliance with the fixed
      charge coverage ratio at June 30, 2005 based on its revised consolidated
      financial statements, as a result of a determination by management to
      re-characterize a lease for certain equipment used by KES Acquisition as a
      capital lease rather than an operating lease. In addition, KES Acquisition
      was
      not in compliance with its obligation to deliver audited financial statements
      in
      the form and time period as set forth in the loan agreement. On June 26,
      2006, the Company received a waiver of default from the lender with respect
      to
      the fixed charge coverage ratio for the restated March 31, 2005 and June 30,
      2005 interim financial statements, as well as with respect to the form and
      timeliness of the September 30, 2005 annual audited financial statements being
      provided to GECC.





16


At
      December 31, 2005 and September 30, 2005, KES Acquisition was in compliance
      with
      the fixed charge coverage ratio based on its consolidated financial statements.





In
      the
      event that KES Acquisition is not in compliance with the fixed charge coverage
      ratio in any future period, the Company intends to seek a further waiver of
      any
      default from the lender, and if no such waiver is received, the lender would
      have the right to accelerate the maturity of the line of credit at that time.





**5.
      Commitment and Contingencies**





Legal
      Proceedings





The
      Company and/or its subsidiary that owned its former operating business, Beyond
      the Wall, Inc., have periodically been defendants in various lawsuits and claims
      from various trade creditors and former landlords. Based on the Company’s
      contract relating to the sale of the Beyond the Wall, Inc. assets, certain
      of
      these claims are the responsibility of the buyer of the Beyond the Wall, Inc.
      business. The Company evaluates its response in each situation based on the
      particular facts and circumstances of a claim. Accordingly, the ultimate outcome
      of these matters cannot be determined at this time and may ultimately result
      in
      judgments and liens against the Company or its assets. The Company has made
      sufficient accruals for the exposure related to such matters that have been
      deemed probable and reasonably estimable at December 31, 2005 and
      September 30, 2005.





KES
      Acquisition has been named in a wrongful death lawsuit pending before the
      Circuit Court of Cabell County, West Virginia, which was filed in December
      2004.
      The action was brought by Stephanie Harshbarger, individually and as
      Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
      KES
      Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an
      unaffiliated contractor, who died while working at the Mill in April 2004.
      KES
      Acquisition is being defended by its insurance carrier. The Company does not
      believe that the resolution of this litigation will have a material adverse
      effect on its financial condition or results of operations.





Operating
      Commitments





The
      Mill
      has been operating under a Management Services Agreement with a management
      company effective through October 31, 2009 that provides for the management
      company to provide, at its expense, employees to serve as the General Manager
      of
      the Mill and provide oversight and general management of the operations of
      the
      Mill, for which the management company receives an annual fee of $700,000,
      payable monthly, and bonus payments based on 16.6% of defined earnings before
      interest, taxes, depreciation and amortization (“EBITDA”) in excess of
      $6,000,000 for the fiscal years ending September 30, 2006 and thereafter.





The
      Company has various short-term commitments for the purchase of materials,
      supplies and energy arising in the ordinary course of business which aggregated
      approximately $9,200,000 and $7,962,000 at December 31, 2005 and September
      30,
      2005, respectively.





**6.
      Redeemable Preferred Stock**





On
      December 22, 2005, 10,000 shares of 13% Series A Preferred Stock with a face
      amount of $10,000,000 that were originally issued by Acquisition Corp. to KES
      Holdings in February 2005 (see Note 2) were transferred to two independent
      charities. Since the Company owned a 2.67% interest in KES Holdings, the pro
      rata portion of the face amount of such 13% Series A Preferred Stock and the
      related accrued dividends had previously been eliminated in consolidation.
      However, as a result of the transfer of such preferred shares to the two
      charities in December 2005, the Company recorded the previously eliminated
      portion of the face amount of the 13% Series A Preferred Stock ($267,000) as
      a
      deemed distribution to the Sellers of KES Acquisition, consistent with the
      accounting for the Acquisition as described at Note 2, and the previously
      eliminated portion of the preferred stock dividends ($28,243) through December
      22, 2005, as interest expense.





17


**7.
      Income Taxes**





Income
      tax expense was $63,000 for the three months ended December 31, 2005, consisting
      of a provision for state income taxes. No federal income tax provision was
      provided for the three months ended December 31, 2005 as a result of the
      utilization of the Company’s net operating loss carryforwards as described
      below. No federal or state income tax provision was provided for the three
      months ended December 31, 2004 due to the Company reporting a pre-tax operating
      loss for such period.





At
      September 30, 2005, the Company had net operating loss carryforwards for
      federal income tax purposes of approximately $291,060,000 that expires from
      2012
      through 2025. The use of approximately $36,000,000 of this net operating loss
      in
      future years may be restricted under Section 382 of the Internal Revenue
      Code.





In
      assessing the potential realization of deferred tax assets, management considers
      whether it is more likely than not that some portion or all of the deferred
      tax
      assets will be realized. The ultimate realization of deferred tax assets is
      dependent upon the Company attaining future taxable income during the periods
      in
      which those temporary differences become deductible. As of September 30, 2005,
      management was unable to determine if it was more likely than not that the
      deferred tax assets would be realized. Accordingly, due to the uncertainty
      surrounding the realization of the benefits of the Company’s tax attributes
      (primarily net operating loss carryforwards), as of September 30, 2005, the
      Company recorded a 100% valuation allowance against its net deferred tax assets
      for financial reporting purposes.





The
      Company is subject to periodic audits by federal, state and local tax
      authorities for various tax liabilities incurred in prior periods from the
      parent entity and its subsidiaries, including previously discontinued
      businesses. The amount of any tax assessments and penalties may be material
      and
      may negatively impact the Company’s operations. Given the uncertainty in the
      amount and the difficulty in estimating the probability of the assessments
      arising from future tax audits, the Company has not made any accruals for such
      tax contingencies.





For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES (see Note 2) are included in the consolidated federal income tax return
      filed by YouthStream as the common parent.  Acquisition Corp. and Atacama
      KES have entered into a Tax Sharing Agreement with YouthStream, pursuant to
      which they have agreed to pay YouthStream an amount equal to 50% of their
      respective "separate company tax liability", subject to compliance with the
      GECC
      secured line of credit.  The term "separate company tax liability" is
      defined as the amount, if any, of the federal income tax liability (including,
      without limitation, liability for any penalty, fine, additions to tax, interest,
      minimum tax and other items applicable to such subsidiary in connection
      with the determination of the subsidiary's tax liability), which such
      subsidiary would have incurred if its federal income tax liability for the
      periods during which it is includible in a consolidated federal income tax
      return with YouthStream were determined generally in the same manner in
      which its separate return liability would have been calculated under Section
      1552(a)(2) of the Internal Revenue Code of 1986, as amended.  YouthStream
      has approximately $255,000,000 of federal net operating loss carryovers
      currently available to offset the consolidated federal taxable income of the
      affiliated group in the future.





18


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**General
      Overview:**





Commencing
      March 1, 2005, the Company has included the operations of a steel mini-mill
      located in Ashland, Kentucky, which represents the only business segment in
      which the Company currently operates, in its consolidated financial statements.
      The Company completed the acquisition of this steel mini-mill on March 9, 2005
      (see “Acquisition of Steel Mini-Mill” below).





**Recent
      Developments:**





During
      September 2005, the Company borrowed $50,000 from certain directors under
      short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
      to fund corporate general and administrative expenses. The notes were subject
      to
      mandatory prepayment based on any proceeds received by the Company from, among
      other sources, the note that the Company received in February 2004 from the
      sale
      of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
      any
      tax sharing payments received under the Tax Sharing Agreement with Acquisition
      Corp. and Atacama KES (see “Acquisition of Steel Mini-Mill” below). On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable from the sale of the
      assets and operations of Beyond the Wall, Inc., and repaid the notes payable
      to
      directors in October 2005.





**Acquisition
      of Steel Mini-Mill:**





In
      September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
      interest in KES Holdings, LLC, a Delaware limited liability company ("KES
      Holdings"), which was formed to acquire certain assets of Kentucky Electric
      Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
      mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
      KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
      limited liability company ("KES Acquisition"), completed the acquisition of
      the
      Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
      consideration of $2,650,000, which was funded through the capital contributions
      of the members of KES Holdings. Members’ capital contributions were also used
      for start-up costs, working capital purposes and payment of deferred maintenance
      of the Mill. KES had ceased production on or about December 16, 2002 and
      filed a voluntary petition for relief under Chapter 11 of the United States
      Bankruptcy Code on February 5, 2003.





The
      Mill
      had been in operation for approximately forty years and was refurbished by
      KES
      Acquisition subsequent to its acquisition.  The refurbished Mill has been
      generating revenues since late January 2004. The current production capacity
      of
      the Mill for finished products, based on the current operating structure and
      man-hours worked, is approximately 200,000 short-tons per year, and the Mill
      is
      currently operating at approximately 100% of such annualized
      capacity.  Management
      is focusing on developing the business and improving operating
      efficiencies.





The
      Mill
      produces bar flats that are produced to a variety of specifications and fall
      primarily into two general quality levels - merchant bar quality steel bar
      flats
      (“MBQ Bar Flats”) for generic types of applications, and special bar quality
      steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
      require the use of alloys, customized equipment and special production
      procedures to insure that the finished product meets critical end-use
      performance characteristics.





The
      Mill
      manufactures over 2,600 different Bar Flat items which are sold to volume niche
      markets, including original equipment manufacturers (“OEMs”), cold drawn bar
      converters, steel service centers and the leaf-spring suspension market for
      light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
      specifically designed to manufacture wider and thicker bar flats up to three
      inches in thickness and twelve inches in width that are required by these
      markets. In addition, the Mill employs a variety of specially designed equipment
      which is necessary to manufacture SBQ Bar Flats to the specifications of the
      Mill’s customers.





On
      March
      9, 2005, YouthStream completed the acquisition of KES Acquisition (the
      "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
      agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
      British Virgin Islands company ("Atacama", and together with KES Holdings,
      collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
      YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
      acquired 100% of the membership interests of KES Acquisition by acquiring (i)
      a
      37.45% membership interest from KES Holdings and (ii) all of the capital stock
      of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
      (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
      Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
      to
      the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
      shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-Voting Common Stock. With respect
      to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
      $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
      and
      $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
      were issued to Atacama. YouthStream also contributed an aggregate of $500,000
      of
      cash to Acquisition Corp. as consideration for the issuance by Acquisition
      Corp.
      of 100% of its Series A Voting Common Stock. In addition, YouthStream will
      periodically be required to purchase shares of Series B Preferred Stock of
      Acquisition Corp. in amounts equal to distributions it receives on its KES
      Holdings membership interest.





19


As
      a
      result of these transactions, YouthStream owns 80.01% of the common stock,
      and
      100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
      stock
      interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
      Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
      (this percentage has increased from 1.00% as a result of the redemption of
      another member’s interest), as a result of which the Company has eliminated its
      $507,000 equity interest in the Notes and $267,000 equity interest in the 13%
      Series A Preferred Stock in the consolidated balance sheet at September 30,
      2005, and its $507,000 equity interest in the Notes and $0 equity interest
      in
      the 13% Series A Preferred Stock in the consolidated balance sheet at December
      31, 2005. YouthStream has consolidated the operations of the Mill through its
      ownership of KES Acquisition commencing March 1, 2005. As a result of the
      Acquisition, the Company’s financial statements for periods ending after March
      1, 2005 are materially different from and are not comparable to its financial
      statements prior to that date.





Subsequent
      to this transaction, the management of the Mill continued unchanged. This
      transaction did not result in any change in the Mill’s business operations or
      financial condition, and, other than as set forth herein, the working capital,
      operating cash flow, debt service obligations and credit profile of the Mill
      were not affected in any way by this transaction.





As
      described herein, the Notes and 13% Series A Preferred Stock were issued by
      Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
      a
      separate legal entity that owns and operates the Mill. The Notes are legal
      obligations solely of Acquisition Corp., and are not obligations of KES
      Acquisition, nor are they secured by the assets or cash flows of the Mill.
      In
      the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
      upon the consent of any senior lender to KES Acquisition at that time. In
      addition, the Notes are non-recourse to the assets of YouthStream, except for
      the shares of capital stock of Acquisition Corp. that have been pledged by
      YouthStream to the holders of the Notes. Pursuant to the terms of the
      transaction documentation in connection with the Acquisition and the loan
      facility with General Electric Capital Corporation (“GECC”), YouthStream and
      Acquisition Corp. are currently limited in their ability to receive cash
      distributions from KES Acquisition, but are permitted to receive tax sharing
      payments as described below. Any change in control of Acquisition Corp. in
      the
      future as a result of the holders of the Notes exercising their legal rights
      would not reasonably be expected to have a material impact on the operations
      or
      financial position of the Mill.




The
      Notes
      are structurally subordinate in right and payment of up to $40,000,000 of senior
      debt, including existing debt obligations in favor of GECC. Scheduled principal
      payments commence in (i) February 2007 with respect to the $19,000,000 principal
      amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
      respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
      In addition, the Notes require additional quarterly principal payments out
      of
      "free cash", as that term is defined in the Note Purchase Agreement. The Notes
      bear interest at the rate of 8% per annum, payable annually during the first
      two
      years of the Note, as provided for in a letter agreement dated as of July 14,
      2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
      the Note holders, and quarterly thereafter. The obligations of Acquisition
      Corp.
      under the Notes are secured by a limited guaranty by YouthStream, which guaranty
      is secured by and limited in recourse solely to a pledge by YouthStream of
      all
      of its interest in Acquisition Corp. As of September 30, 2005, the balance
      outstanding on the Notes was $39,493,000, and related accrued interest payable
      was $1,852,384. As of December 31, 2005, the balance outstanding on the notes
      was $39,493,000 and the related accrued interest payable was $2,648,736.





20


Future
      scheduled principal payments on the Notes are summarized as
      follows:





**KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**Years
                Ending September 30,2006
            
            $
            ---
            
            $
            ---2007
            
            
            1,900,000
            
            
            ---2008
            
            
            950,000
            
            
            ---2009
            
            
            950,000
            
            
            ---2010
            
            
            950,000
            
            
            ---2011
            
            
            2,850,000
            
            
            4,200,0002012
            
            
            2,850,000
            
            
            4,200,0002013
            
            
            2,850,000
            
            
            4,200,0002014
            
            
            ---
            
            
            1,264,0002015
            
            
            5,700,000
            
            
            7,136,000Total
            
            $
            19,000,000
            
            $
            21,000,000





Pursuant
      to a further letter agreement dated April 11, 2006 and effective as of February
      27, 2006 by and among Acquisition Corp. and the Note holders, the interest
      payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
      short-term notes due February 27, 2007 in the principal amount of $3,200,000,
      with interest at 8% per annum.





For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES were collectively required to have, on a consolidated basis, in
      excess of $4,000,000 of earnings before interest, taxes, depreciation and
      amortization, calculated in accordance with generally accepted accounting
      principles ("EBITDA").  For each of the fiscal years ending on and
      after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
      are
      collectively required to have, on a consolidated basis, in excess of $7,200,000
      of EBITDA.  At March 31 of each fiscal year following the fiscal year
      ending September 30, 2005 in which the obligations under the Notes remain
      outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
      required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
      for
      the six months then ended. Effective September 23, 2005, the holders of the
      Notes executed an agreement to amend the Notes to eliminate the requirement
      that
      Acquisition Corp., KES Acquisition and Atacama KES collectively have, on a
      consolidated basis, in excess of $4,000,000 of EBITDA for the nine months ending
      September 30, 2005.




The
      holders of each share of 13% Series A Preferred Stock are entitled to receive
      a
      cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
      accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
      liquidation preference equal to $1,000 per share, plus accrued but unpaid
      dividends, and is redeemable out of, and to the extent of, legally available
      funds, at a redemption price equal to the sum of $1,000 and all accrued but
      unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
      Corp., (ii) the occurrence of an event of default under the Note Purchase
      Agreement pursuant to which the Notes were issued or (iii) the first anniversary
      of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
      beginning with the second anniversary of the initial issuance of the 13% Series
      A Preferred Stock, Acquisition Corp. will be required to use "free cash", as
      that term is defined in the Securities Purchase Agreement, to commence redeeming
      shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
      with limited exceptions. As of September 30, 2005, the balance outstanding
      on
      the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
      payable were $1,885,129. As of December 31, 2005, the balance outstanding on
      the
      13% Series A Preferred Stock was $25,000,000 and related accrued dividends
      payable were $2,724,658.





Since
      the
      acquisition of the Mill by the Sellers, the Mill has been operating under a
      Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
      Agreement"), which agreement remained in effect following the closing. The
      principals of Pinnacle Steel LLC that manage the Mill have significant
      experience and expertise in the steel industry. The Pinnacle Agreement will
      remain in effect through October 31, 2009, subject to earlier termination or
      extension based on the financial performance of the Mill. Pinnacle is entitled
      to a monthly management fee and a management incentive fee as provided in the
      Pinnacle Agreement.





21


Subsequent
      to the acquisition of the Mill by the Sellers, KES Acquisition issued an
      aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
      certain of their respective affiliates (the “Subordinated Promissory Notes”).
      The proceeds from the Subordinated Promissory Notes were used to accelerate
      the
      development and expansion of the Mill’s operations. The Subordinated Promissory
      Notes bear interest at the rate of 12% per annum, with interest payable monthly,
      subject to compliance with various agreements and covenants, are secured by
      a
      subordinated security interest in all of the assets of KES Acquisition, and
      are
      subject to an Intercreditor and Subordination Agreement dated March 24, 2004
      with GECC. When originally issued, principal and interest were due and payable
      upon the earlier to occur of (i) an event of default under the Loan and Security
      Agreement with GECC or (ii) each note’s respective due date, which ranged from
      March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
      of
      the notes had all been extended to December 31, 2006, if not repaid earlier. At
      September 30, 2005, accrued interest payable with respect to the Subordinated
      Promissory Notes was $1,085,753. At December 31, 2005, accrued interest payable
      with respect to the Subordinated Promissory Notes was $1,297,479.




Related
      parties with respect to this transaction are summarized as follows: Robert
      Scott
      Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G. Byer,
      another director of YouthStream, is an employee of affiliates of Libra/KES
      Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
      economic interest in KES Holdings through his relationship with Libra
      Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
      effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
      of
      Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
      his
      family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
      either directly or through the Ravich Trust, holds 1,860,000 shares of
      YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
      common stock exercisable through August 31, 2008, 1,000,000 shares of
      YouthStream's redeemable preferred stock and an option to purchase 200,000
      shares of YouthStream’s common stock exercisable through June 26, 2013, which
      was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
      connection with his election to the Board of Directors. Through his positions
      at
      Libra/KES, Mr. Ravich managed the business of KES Acquisition through February
      28, 2005. Subordinated Promissory Notes with a principal amount of $1,650,000
      and $450,000 are payable to the Ravich Trust and Libra Securities Holdings,
      LLC, the parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer have
      each previously acquired an option from the Ravich Trust for $2,500 ($0.04
      per
      share) to purchase 62,500 shares of YouthStream's redeemable preferred stock
      issued to the Ravich Trust in January 2003, exercisable at $0.36 per share
      until
      December 31, 2006 or earlier upon the occurrence of certain events.





The
      Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
      “Business Combinations”, and in accordance with Emerging Issues Task Force
      (EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
      substantial and continuing relationships between YouthStream and the Sellers,
      and the provisions of EITF 88-16 that are required to be considered when
      determining the extent of fair value/predecessor basis to be used in recording
      the transaction, the Acquisition has been recorded at predecessor basis. Since
      the debt and equity held by the Sellers represented almost the entire amount
      of
      capital at risk both before and after the Acquisition, the application of the
      “monetary test” specified in Section 3 of EITF 88-16, which limits the portion
      of the purchase consideration that can be valued at fair value to the percentage
      of the total consideration that is monetary, was utilized by the Company in
      determining to record the transaction at predecessor basis. The excess of the
      purchase price over predecessor basis of the net assets acquired has been
      reflected as a deemed distribution of $63,104,423 to the Sellers at the date
      of
      acquisition in the consolidated financial statements.





For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES are included in the consolidated federal income tax return filed by
      YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
      entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
      have agreed to pay YouthStream an amount equal to 50% of their respective
      "separate company tax liability", subject to compliance with the GECC secured
      line of credit.  The term "separate company tax liability" is defined as
      the amount, if any, of the federal income tax liability (including, without
      limitation, liability for any penalty, fine, additions to tax, interest, minimum
      tax and other items applicable to such subsidiary in connection with the
      determination of the subsidiary's tax liability), which such subsidiary
      would have incurred if its federal income tax liability for the periods during
      which it is includible in a consolidated federal income tax return with
      YouthStream were determined generally in the same manner in which its
      separate return liability would have been calculated under Section 1552(a)(2)
      of
      the Internal Revenue Code of 1986, as amended.  YouthStream has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset the consolidated federal taxable income of the affiliated
      group in the future.





22


The
      total
      purchase price of $65,000,000, as well as the terms and conditions of the Notes
      and 13% Series A Preferred Stock issued to the Sellers, was determined to be
      at
      fair value based on reports prepared by an independent valuation firm.





The
      following is a summary of the assets acquired and liabilities assumed at
      predecessor basis at February 28, 2005.





Assets
                Acquired:Cash
            
            $
            913,194Accounts
                receivable
            
            
            10,781,836Allowance
                for doubtful accounts
            
            
            (328,351
            )Inventories
            
            
            18,762,218Prepaid
                expenses and other current assets
            
            
            904,271Property,
                plant and equipment
            
            
            6,630,012Accumulated
                depreciation and amortization
            
            
            (639,254
            )Due
                from YouthStream Acquisition Corp.
            
            
            187,702Other
                non-current assets
            
            
            721,393Total
                assets acquired
            
            
            37,933,021





Liabilities
                Assumed:Accounts
                payable
            
            9,566,327Accrued
                expenses
            
            
            1,267,016Accrued
                interest payable
            
            
            593,260Deferred
                rent
            
            
            165,413Subordinated
                promissory notes payable
            
            
            7,000,000Line
                of credit
            
            
            15,495,095Equipment
                contract payable
            
            
            291,223Capital
                lease obligation
            
            
            1,877,179Total
                liabilities assumed
            
            
            36,255,513Net
                assets acquired
            
            
            1,677,508Adjustment
                to recognize minority interest
            
            
            (331,981
            )$
            1,345,527Total
                purchase consideration, net of intercompany eliminations of 2.67%
                interest
                held by KES Holdings:8%
                Subordinated secured promissory notes payable
            
            $
            39,493,00013%
                Series A preferred stock
            
            
            24,733,000Net
                purchase consideration
            
            
            64,226,000Minority
                interests in equity
            
            
            223,950Adjustment
                to record deemed distribution to Sellers
            
            
            (63,104,423
            )$
            1,345,527





The
      amount due from YouthStream Acquisition Corp. of $187,702 represents costs
      incurred by KES Acquisition with respect to the Acquisition, which were included
      in the $1,171,406 of transaction costs related to the Acquisition charged to
      operations during the year ended September 30, 2005.





23


As
      of
      September 30, 2004, the Company had incurred $175,144 of costs with respect
      to
      the Acquisition, which were presented as deferred costs in the Company’s
      consolidated balance sheet at such date. These costs were included in the
      $1,171,406 of transaction costs related to the Acquisition charged to operations
      during the year ended September 30, 2005.





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months ended December 31, 2005, net income allocable
      to
      the 19.99% minority shareholders was $37,526.





**Pro
      Forma Information**





The
      following pro forma operating data shown below presents the results of
      operations for the three months ended December 31, 2004, as if the Acquisition
      had occurred on the last day of the immediately preceding fiscal period.
      Accordingly, transaction costs related to the Acquisition are not included
      in
      the net loss from continuing operations shown below. The Mill commenced
      generating revenues in late January 2004. The pro forma results are not
      necessarily indicative of the financial results that might have occurred had
      the
      Acquisition actually taken place on the respective dates, or of future results
      of operations. P ro
      forma
      information for the three months ended December 31, 2004 is summarized as
      follows:





Net
                sales
            
            $
            27,487,729Cost
                of sales
            
            
            25,760,188Gross
                margin
            
            
            1,727,541Operating
                income
            
            
            381,860Interest
                expense
            
            
            (2,361,442
            )Minority
                interest
            
            
            199,109Net
                loss from continuing operations
            
            $
            (1,696,846
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )Weighted
                average common shares outstanding
            
            
            39,242,251





**Critical
      Accounting Policies and Estimates:**





The
      Company prepared its financial statements in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      financial statements requires the use of estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements and the reported
      amount of revenues and expenses during the reporting period. Management
      periodically evaluates the estimates and judgments made. Management bases its
      estimates and judgments on historical experience and on various factors that
      are
      believed to be reasonable under the circumstances. Actual results may differ
      from these estimates as a result of different assumptions or
      conditions.





The
      following critical accounting policies affect the more significant judgments
      and
      estimates used in the preparation of the Company’s financial statements.




Revenue
      Recognition:




The
      Company recognizes revenue when there is persuasive evidence that an arrangement
      exists, delivery of the product has occurred and title has passed, the selling
      price is both fixed and determinable, and collectibility is reasonably assured,
      all of which generally occur either upon shipment of the Company’s product or
      delivery of the product to the destination specified by the
      customer.





24


Accounts
      Receivable:





The
      Company grants credit to its customers generally in the form of short-term
      trade
      accounts receivable. Management evaluates the credit risk of its customers
      utilizing historical data and estimates of future performance. Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances. When appropriate, management provides for probable
      uncollectible amounts through a provision for doubtful accounts and an
      adjustment to a valuation allowance. Management reviews and adjusts this
      allowance periodically based on the aging of accounts receivable balances,
      historical write-off experience, customer concentrations, customer
      creditworthiness, and current industry and economic trends. Balances that are
      still outstanding after management has used reasonable collection efforts are
      written off through a charge to the valuation allowance and a credit to accounts
      receivable.





Inventories:





Inventories
      are comprised of raw materials (consisting of billets and scrap metal),
      semi-finished goods and finished goods. Inventory costs include material, labor
      and manufacturing overhead. Inventories are valued at the lower of average
      cost
      or market. The average cost of the billets and scrap metal is adjusted
      quarterly.





Impairment
      of Assets:





Long-lived
      assets are evaluated for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable in
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”. An asset is considered impaired if its carrying amount
      exceeds the future net cash flow the asset is expected to generate. If an asset
      is considered to be impaired, the impairment to be recognized is measured by
      the
      amount by which the carrying amount of the asset exceeds its fair market value.
      The recoverability of long-lived assets is assessed by determining whether
      the
      unamortized balances can be recovered through undiscounted future net cash
      flows
      of the related assets. The amount of impairment, if any, is measured based
      on
      projected discounted future net cash flows using a discount rate reflecting
      the
      Company’s average cost of capital.





Income
      Taxes:





The
      Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under this method, deferred income taxes are
      provided for differences between the carrying amounts of the Company’s assets
      and liabilities for financial reporting purposes and the amounts used for income
      tax purposes using expected tax rates in effect for the year in which those
      temporary differences are expected to be recovered or settled. KES Acquisition
      Company is a limited liability company and as such does not provide for federal
      and state income taxes. Rather, its income is taxed to its members.





The
      Company records a valuation allowance to reduce its deferred tax assets to
      the
      amount that is more likely than not to be realized. In the event the Company
      was
      to determine that it would be able to realize its deferred tax assets in the
      future in excess of its recorded amount, an adjustment to the deferred tax
      assets would be credited to operations in the period such determination was
      made. Likewise, should the Company determine that it would not be able to
      realize all or part of its deferred tax assets in the future, an adjustment
      to
      the deferred tax assets would be charged to operations in the period such
      determination was made.





**Recent
      Accounting Pronouncements and Developments:**





In
      December 2004, the Financial Accounting Standards Board
      (“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment”
(“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for
      Stock-Based Compensation”. SFAS No. 123R supersedes Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
      amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires
      that the Company measure the cost of employee services received in exchange
      for
      equity awards based on the grant date fair value of the awards. The cost will
      be
      recognized as compensation expense over the vesting period of the awards. The
      Company was required to adopt SFAS No. 123R effective January 1,
      2006. Under this method, the Company will begin recognizing compensation cost
      for equity-based compensation for all new or modified grants after the date
      of
      adoption. The pro forma disclosures previously permitted under SFAS No. 123
      will no longer be an alternative to financial statement recognition. In
      addition, the Company will recognize the unvested portion of the grant date
      fair
      value of awards issued prior to adoption based on the fair values previously
      calculated for disclosure purposes over the remaining vesting period of the
      outstanding options and warrants.




25


The
      Company will adopt SFAS No. 123R effective January 1, 2006 and will
      use the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS
      No. 123R for all share-based payments granted after the effective date and
      (b) based on the requirements of SFAS No. 123R for all awards granted
      to employees prior to the effective date of SFAS No. 123R that remain
      unvested on the effective date. Although the expense for stock options that
      may be vested or granted in future periods cannot be determined at this
      time due to the uncertainty of the vesting or timing of future grants, the
      Company’s future stock price, and the related fair value calculation, the
      adoption of SFAS No. 123R could have a material effect on the Company’s
      future financial statements.





In
      May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”).
      SFAS No. 154 is a replacement of APB Opinion No. 20, “Accounting
      Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements - (an Amendment of APB Opinion No. 28)” and provides guidance on
      the accounting for and reporting of accounting changes and error corrections.
      SFAS No. 154 establishes retrospective application as the required method
      for reporting a change in accounting principle, and provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. Retrospective application is the application
      of a
      different accounting principle to a prior accounting period as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. SFAS No. 154 also
      addresses the reporting of the correction of an error by restating previously
      issued financial statements. SFAS No. 154 is effective for accounting
      changes and error corrections occurring in fiscal years beginning after
      December 15, 2005. The adoption of SFAS No. 154 is not expected to have any
      impact on the Company’s financial statement presentation or
      disclosures.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that has an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





On
      September 22, 2005, the Securities and Exchange Commission ("SEC") issued rules
      to delay by one year the required reporting by management on internal controls
      over financial reporting for non-accelerated filers. The new SEC rule extends
      the compliance date for such registrants to fiscal years ending on or after
      July
      15, 2007. Accordingly, the Company qualifies for the deferral until its fiscal
      year ending September 30, 2007 to comply with the internal control reporting
      requirements. On August 9, 2006, the SEC issued two releases that when adopted
      are designed to grant smaller public companies further relief from compliance
      with Section 404 of the Sarbanes-Oxley Act of 2002.





**Results
      of Operations:**





Effective
      February 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.
      (“BTW”), sold substantially all of its assets and operations to a group
      unaffiliated with the Company (which included certain former management of
      BTW)
      for a combination of cash and a note. On September 30, 2005, the Company
      received a final cash payment of $258,922 with regard to this transaction.
      Accordingly, for the three months ended December 31, 2004, the Company did
      not
      have any revenue-generating operations.





26


The
      Company acquired the Mill effective February 28, 2005, and the operations of
      the
      Mill have been consolidated commencing March 1, 2005. As a result of the
      acquisition of the Mill, the Company’s financial statements for periods ending
      after March 1, 2005 are materially different from and are not comparable to
      its
      financial statements prior to that date.




**Three
      Months Ended December 31, 2005 and 2004:**





Net
      Sales. Net sales were $33,482,842 for the three months ended December 31, 2005,
      an average of $11,160,947 per month. If the Company had owned the Mill for
      the
      three months ended December 31, 2004, pro forma net sales would have been
      $27,487,729, an average of $9,162,576 per month.





Cost
      of
      Sales. Cost of sales was $28,875,532 for the three months ended December 31,
      2005, resulting in gross profit of $4,607,310 and a gross profit margin of
      13.8%. If the Company had owned the Mill for the three months ended December
      31,
      2004, pro forma gross profit margin would have been 6.3%.





Selling
      Expenses. For the three months ended December 31, 2005, selling expenses were
      $385,571 or 1.2% of sales. The Company did not have any selling expenses for
      the
      three months ended December 31, 2004. Selling expenses consist primarily of
      sales commissions and personnel-related costs.





General
      and Administrative Expenses. For the three months ended December 31, 2005,
      general and administrative expenses were $1,341,429 or 4.0% of sales. For the
      three months ended December 31, 2004, the Company incurred corporate general
      and
      administrative expenses of $194,671. General and administrative expenses consist
      primarily of management compensation, legal and accounting fees and insurance
      costs.





Income
      (Loss) from Operations. Income from operations was $2,880,310 for the three
      months ended December 31, 2005, as compared to a loss from operations of
      $(194,671) for the three months ended December 31, 2004.





Interest
      Income. Interest income was $99 for the three months ended December 31, 2005,
      as
      compared to $14,365 for the three months ended December 31, 2004.





Interest
      Expense. For the three months ended December 31, 2005, interest expense was
      $2,433,564, which included interest expense related to the 8% notes payable
      of
      $796,352 and the 13% Series A Preferred Stock of $839,528 issued in conjunction
      with the acquisition of the Mill, the 12% notes payable of $211,727 and the
      4%
      notes payable of $10,885. For the three months ended December 31, 2004, interest
      expense was $10,572.





Other
      Income (Expense). For the three months ended December 31, 2005, other income
      was
      $6,689, as compared to other expense of $17,738 for the three months ended
      December 31, 2004.





Income
      (Loss) before Income Taxes and Minority Interest. Income before income taxes
      and
      minority interest was $453,534 for the three months ended December 31, 2005,
      as
      compared to a loss of $(208,616) for the three months ended December 31, 2004.





Income
      Taxes. Income
      tax expense was $63,000 for the three months ended December 31, 2005, consisting
      of a provision for state income taxes. No federal income tax provision was
      provided for the three months ended December 31, 2005 as a result of the
      utilization of the Company’s net operating loss carryforwards. No federal or
      state income tax provision was provided for the three months ended December
      31,
      2004 due to the Company reporting a pre-tax operating loss for such
      period.





Income
      (Loss) before Minority Interest. Income before minority interest was $390,534
      for the three months ended December 31, 2005, as compared to a loss before
      minority interest of $208,616 for the three months ended December 31,
      2004.





27


Minority
      Interest - Related Parties. Minority interest - related parties was $0 for
      the
      three months ended December 31, 2005 and 2004. Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months ended December 31, 2005, net income allocable
      to
      the 19.99% minority shareholders was $37,526.





Net
      Income (Loss). Net income was $390,534 for the three months ended December
      31,
      2005, as compared a loss of $208,616 for the three months ended December 31,
      2004.





**Liquidity
      and Capital Resources - December 31, 2005:**





**Overview:**





On
      March
      9, 2005, YouthStream completed the acquisition of the Mill. In connection with
      the Company’s acquisition and consolidation of the Mill, the Company also
      acquired $913,194 of cash. The Company used substantially all of its available
      cash resources to fund the acquisition of the Mill, including its contribution
      of an aggregate of $500,000 of cash to Acquisition Corp. and the payment of
      the
      costs related to the transaction. Accordingly, the Company will require
      additional operating capital to fund corporate general and administrative
      expenses, which the Company expects to obtain primarily through periodic tax
      sharing payments from Acquisition Corp. and Atacama KES. The Mill relies on
      cash
      flows from operations to support a secured line of credit with GECC to fund
      its
      separate operations. As a result of improved operating performance of the Mill
      beginning in late 2005, the Company has been able to increase borrowing
      availability under this line of credit.





As
      of
      December 31, 2005 and September 30, 2005, the balance outstanding on the line
      of
      credit was $15,878,828 and $19,009,379, respectively, which has been presented
      as a current liability in the consolidated balance sheet at such date due to
      the
      collateral securing such line of credit consisting primarily of current assets
      and the continuing uncertainty with respect to the Company’s ability to maintain
      compliance under the terms and conditions of the line of credit.





At
      March
      31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
      ratio based on its consolidated financial statements as originally filed, in
      part relating to changes to its accounting procedures as a result of the review
      of its financial statements conducted in conjunction with its acquisition by
      YouthStream (see Note 2), and subsequently received a waiver of default from
      the
      lender. At June 30, 2005, KES Acquisition was in compliance with the fixed
      charge coverage ratio based on its consolidated financial statements as
      originally filed. However, KES Acquisition was not in compliance with the fixed
      charge coverage ratio at June 30, 2005 based on its revised consolidated
      financial statements, as a result of a determination by management to
      re-characterize a lease for certain equipment used by KES Acquisition as a
      capital lease rather than an operating lease. In addition, KES Acquisition
      was
      not in compliance with its obligation to deliver audited financial statements
      in
      the form and time period as set forth in the loan agreement. On June 26,
      2006, the Company received a waiver of default from the lender with respect
      to
      the fixed charge coverage ratio for the restated March 31, 2005 and June 30,
      2005 interim financial statements, as well as with respect to the form and
      timeliness of the September 30, 2005 annual audited financial statements being
      provided to GECC.





At
      December 31, 2005 and September 30, 2005, KES Acquisition was in compliance
      with
      the fixed charge coverage ratio based on its consolidated financial statements.





In
      the
      event that KES Acquisition is not in compliance with the fixed charge coverage
      ratio in any future period, the Company intends to seek a further waiver of
      any
      default from the lender, and if no such waiver is received, the lender would
      have the right to accelerate the maturity of the line of credit at that time.





28


To
      the
      extent that the Mill generates taxable income in the future, the Tax Sharing
      Agreement with Acquisition Corp. and Atacama KES will generate cash payments
      to
      YouthStream equal to 50% of their respective “separate company tax liability”,
      subject to compliance with the GECC secured line of credit. At September 30,
      2005, the tax sharing payment due to YouthStream was $342,292, which was
      received in December 2005. At December 31, 2005, the tax sharing payment due
      to
      YouthStream was $444,365, which was received in February 2006. YouthStream
      has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset any federal income tax liability of Acquisition Corp and
      Atacama KES in subsequent periods. YouthStream expects that its federal net
      operating loss carryovers will be sufficient to absorb most of any future
      federal income tax liability of Acquisition Corp. and Atacama KES.





The
      Mill
      restarted operations in January 2004 after being acquired by the previous
      owners, and has incurred losses until recently. The long-term economic viability
      of the Mill and its ability to fund its operations and debt service
      requirements, including maintaining compliance with various debt covenants
      and
      servicing the interest and principal obligations on the Notes and the dividends
      and redemption features on the 13% Series A Preferred Stock issued in connection
      with the acquisition of the Mill, is dependent on various internal and external
      factors, including the Mill’s ability to operate on a sustained basis at 80% or
      more of its annual capacity of 200,000 tons per year, as currently configured.
      To the extent that the Mill is not able to maintain this operating threshold,
      the ability of the Mill to generate sufficient cash flows to fund its operations
      and debt service requirements and maintain compliance with various debt
      covenants may be impaired. In such event, the Company may have to consider
      a
      formal or informal restructuring or reorganization, including a sale or other
      disposition of its assets.





**Going
      Concern:**





The
      Company has incurred recurring operating losses since its inception. The
      Company incurred
      a net loss of $3,430,562 and a negative cash flow from operating activities
      of
      $4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
      of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
      30,
      2005. As
      of
      September 30, 2005, the Company had insufficient capital to fund all of its
      obligations on a consolidated basis. These factors raise substantial doubt
      about
      the Company’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments to reflect the possible future effect
      of the recoverability and classification of assets or the amounts and
      classifications of liabilities that may result from the outcome of this
      uncertainty.





On
      March
      9, 2005, the Company completed the acquisition of a steel mini-mill located
      in
      Ashland, Kentucky. The Company utilized substantially all of its available
      cash
      resources to fund such acquisition and will require additional operating capital
      to fund corporate general and administrative expenses, which the Company expects
      to obtain primarily through periodic tax sharing payments from Acquisition
      Corp.
      and Atacama KES. In addition, the steel mini-mill restarted operations in late
      January 2004 after being acquired by the previous owners, and until recently
      has
      incurred losses. For the year ended September 30, 2005, operating income was
      $2,691,955 (which included the operations of the steel mini-mill for the seven
      month period March through September 2005), exclusive of interest expense.
      For
      the three months ended December 31, 2005, operating income was $2,880,310,
      exclusive of interest expense. The steel mini-mill relies on cash flows from
      operations to support a secured line of credit with General Electric Capital
      Corporation to fund its separate operations. As a result of improved operating
      performance of the steel mini-mill beginning in late 2005, the Company has
      been
      able to increase borrowing availability under this line of credit.





Based
      on
      its current level of operations, the Company believes that its current cash
      resources provided by operations and the secured line of credit will be adequate
      to fund its operations through September 30, 2006. However, to the extent the
      Company’s estimates are inaccurate or its assumptions are incorrect, the Company
      may not have sufficient cash resources to fund its operations. In such event,
      the Company may have to consider a formal or informal restructuring or
      reorganization, including a sale or other disposition of its
      assets.





The
      Company’s management may also consider various strategic alternatives in the
      future, including the acquisition of new business opportunities, which may
      be
      from related or unrelated parties.  However, there can be no assurances
      that such efforts will ultimately be successful.  The Company may finance
      any acquisitions through a combination of debt and/or equity
      securities.





29


Operating
      Activities. During the three months ended December 31, 2005, the Company
      generated $2,832,915 of cash in operating activities, both to fund the corporate
      overhead of YouthStream and to fund the operations of the Mill. During the
      three
      months ended December 31, 2004, the Company used $203,147 of cash in operating
      activities to fund its corporate general and administrative expenses.





Investing
      Activities. During the three months ended December 31, 2004, net cash provided
      by investing activities of $87,225 consisted of principal and interest payments
      on the Beyond the Wall note receivable that the Company received in the February
      2004 sale of the assets and operations of Beyond the Wall, reduced by deferred
      costs related to the KES transaction of $160,002. During the three months ended
      December 31, 2005, the Company did not have any investing activities.





Financing
      Activities. During the three months ended December 31, 2005, net cash utilized
      in financing activities was $3,287,097, consisting of $3,130,551 to reduce
      borrowings under the secured line of credit with GECC, the repayment of $50,000
      of short-term notes payable to certain directors, and payments on an equipment
      contract payable and capital lease obligation of $106,546. During the three
      months ended December 31, 2004, the Company did not have any financing
      activities.





**Summary
      of Restricted and Unrestricted Assets, Liabilities and
      Equity:**





Almost
      all of the Company’s net assets are owned by KES Acquisition, a consolidated
      subsidiary.  As a result of various contractual restrictions contained in
      various financing agreements (as previously described) and documents relating
      to
      the Acquisition, there are limits on the Company’s ability to transfer assets
      from KES Acquisition to Youthstream, whether in the form of loans and advances,
      cash dividends, tax-sharing payments, or otherwise, without notice to and/or
      consent of one or more third parties.





A
      summary
      of the Company's restricted and unrestricted assets, liabilities and equity
      at
      December 31, 2005 and at September 30, 2005 is presented below.





December
                31, 2005
            
            Unrestricted
            
            Restricted
            
            As
                ReportedCurrent
                assets
            
            $
            500,540
            
            $
            35,994,977
            
            $
            36,495,517Property,
                plant and equipment, net
            
            
            -
            
            
            5,385,203
            
            
            5,385,203Other
                assets
            
            
            -
            
            
            555,209
            
            
            555,209Total
                assets
            
            $
            500,540
            
            $
            41,935,389
            
            $
            42,435,929Current
                liabilities
            
            $
            3,908,112
            
            $
            36,336,068
            
            $
            40,244,180Non-current
                liabilities
            
            
            80,171,000
            
            
            1,497,565
            
            
            81,668,565Equity:Retained
                earnings (accumulated deficit)
            
            
            (349,937,425
            )
            
            3,062,561
            
            
            (346,874,864
            )Other
            
            
            266,358,853
            
            
            1,039,195
            
            
            267,398,048Total
                liabilities and equity
            
            $
            500,540
            
            $
            41,935,389
            
            $
            42,435,929




30





September
                30, 2005
            
            Unrestricted
            
            Restricted
            
            As
                ReportedCurrent
                assets
            
            $
            261,740
            
            $
            35,453,821
            
            $
            35,715,561Property,
                plant and equipment, net
            
            
            -
            
            
            5,567,745
            
            
            5,567,745Other
                assets
            
            
            -
            
            
            638,948
            
            
            638,948Total
                assets
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254Current
                liabilities
            
            $
            4,224,995
            
            $
            30,411,237
            
            $
            34,636,232Non-current
                liabilities
            
            
            78,257,234
            
            
            8,629,138
            
            
            86,886,372Equity:Retained
                earnings (accumulated deficit)
            
            
            (348,435,183
            )
            
            1,169,785
            
            
            (347,265,398
            )Other
            
            
            266,214,694
            
            
            1,450,354
            
            
            267,665,048Total
                liabilities and equity
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254





**Principal
      Commitments:**





At
      December 31, 2005, the Company's principal commitments consisted of the
      following obligations:





Payments
                Due by 12 Month Periods
              Ending
                December 31,
              (in
                thousands)Contractual
                cash obligations
            
            Total
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            There-after4%
                notes payable
            
            $
            4,917
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,917
            
            $
            -12%
                subordinated promissory notes payable
            
            
            7,000
            
            
            7,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -8%
                subordinated secured promissory notes payable
            
            
            39,493
            
            
            -
            
            
            1,849
            
            
            925
            
            
            925
            
            
            925
            
            
            34,869Secured
                line of credit
            
            
            15,879
            
            
            -
            
            
            15,879
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                leases
            
            
            1,487
            
            
            424
            
            
            400
            
            
            390
            
            
            273
            
            
            -
            
            
            -Capital
                lease obligation
            
            
            1,596
            
            
            386
            
            
            448
            
            
            521
            
            
            241
            
            
            -
            
            
            -Equipment
                contact payable
            
            
            231
            
            
            79
            
            
            87
            
            
            65
            
            
            -
            
            
            -
            
            
            -Management
                services agreement
            
            
            2,683
            
            
            700
            
            
            700
            
            
            700
            
            
            583
            
            
            -
            
            
            -4%
                Series A Preferred Stock subject to mandatory redemption
            
            
            5,269
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,269
            
            
            -13%
                Series A Preferred Stock of subsidiary subject to mandatory redemption,
                excluding accrued dividends (assumes adequate defined “free cash flow” to
                fund payments)
            
            
            26,618
            
            
            -
            
            
            3,958
            
            
            3,958
            
            
            3,958
            
            
            3,958
            
            
            10,786Total
                contractual cash obligations
            
            $
            105,173
            
            $
            8,589
            
            $
            23,321
            
            $
            6,559
            
            $
            5,980
            
            $
            15,069
            
            $
            45,655





At
      December 31, 2005 and September 30, 2005, the Company did not have any material
      commitments for capital expenditures.





At
      December 31, 2005 and September 30, 2005, the Company has various short-term
      commitments for the purchase of materials, supplies and energy arising in the
      ordinary course of business which aggregated approximately $9,200,000 and
      $7,962,000, respectively.





31


**Off-Balance
      Sheet Arrangements:**





The
      Company does not have any transactions, obligations or relationships that could
      be considered off-balance sheet arrangements at December 31, 2005 or September
      30, 2005.





**ITEM
      3. CONTROLS AND PROCEDURES**





(a)
      Evaluation of Disclosure Controls and Procedures







Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted by the Company under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported, within
      the
      time periods specified in the rules and forms of the Securities and Exchange
      Commission. Disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed in the reports filed under the Securities Exchange Act of 1934 is
      accumulated and communicated to management, including its principal executive
      and financial officers, as appropriate, to allow timely decisions regarding
      required disclosure.





The
      Company carried out an evaluation, under the supervision and with the
      participation of its management, including its principal executive and financial
      officers, of the effectiveness of the design and operation of the Company's
      disclosure controls and procedures as of the end of the period covered by this
      report. Based upon and as of the date of that evaluation, the Company's
      principal executive and financial officers concluded that there were material
      weaknesses in the accounting and financial systems at the Company's Mill, which
      resulted in deficient disclosure controls and procedures. The Mill was acquired
      effective March 1, 2005, and its operations have been included in the
      consolidated financial statements of the Company from that date forward. In
      addition, as a result of this evaluation, the Company's consolidated financial
      reporting and disclosure controls were also determined to have material
      weaknesses.





Specifically,
      the Mill lacks adequate accounting systems and controls and procedures to
      process information for inclusion in the Company's reports filed with the
      Securities and Exchange Commission. Furthermore, the Mill also lacks adequate
      accounting personnel in general and adequately trained accounting personnel
      in
      particular in order to be able to process and generate the required financial
      information to be included in the Company's consolidated financial statements
      on
      a timely basis. The Company has begun to address these issues by reviewing
      and
      revising its internal accounting policies and procedures, as necessary. The
      Company also intends to increase the resources and personnel allocated to the
      Mill's accounting department. The Company expects that the resolution of these
      issues will take several months.





(b)
      Changes in Internal Controls





There
      were no changes in the Company’s internal controls or in other factors that
      could have significantly affected those controls subsequent to the date of
      the
      Company’s most recent evaluation.





32




**PART
      II****.
      OTHER INFORMATION**








**ITEM
      1. LEGAL PROCEEDINGS**





The
      Company and/or its subsidiary that owned its former operating business, Beyond
      the Wall, have periodically been defendants in various lawsuits and claims
      from
      various trade creditors and former landlords. Based on the Company’s contract
      relating to the sale of the Beyond the Wall assets, certain of these claims
      are
      the responsibility of the buyer of the Beyond the Wall business. The Company
      evaluates its response in each situation based on the particular facts and
      circumstances of a claim. Accordingly, the ultimate outcome of these matters
      cannot be determined at this time and may ultimately result in judgments and
      liens against the Company or its assets. The Company has made sufficient
      accruals for the exposure related to such matters that have been deemed probable
      and reasonably estimable at December 31, 2005 and September 30,
      2005.




KES
      Acquisition has been named in a wrongful death lawsuit pending before the
      Circuit Court of Cabell County, West Virginia, which was filed in December
      2004.
      The action was brought by Stephanie Harshbarger, individually and as
      Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
      KES
      Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an
      unaffiliated contractor, who died while working at the Mill in April 2004.
      KES
      Acquisition is being defended by its insurance carrier. The Company does not
      believe that the resolution of this litigation will have a material adverse
      effect on its financial condition or results of operations.




**ITEM
        2. UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**
  Not
        Applicable.
  **ITEM
          3. DEFAULTS UPON SENIOR SECURITIES**
  Not
          Applicable.
  **ITEM
            4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  Not
            Applicable.
  **ITEM
              5. OTHER INFORMATION**
  Not
              Applicable.





**ITEM
      6. EXHIBITS**





A
      list of
      exhibits required to be filed as part of this report is set forth in the Index
      to Exhibits, which immediately precedes such exhibits, and is incorporated
      herein by reference.





33




**SIGNATURES**








Pursuant
      to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934,
      the registrant has caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.








YOUTHSTREAM
                MEDIA NETWORKS, INC.(Registrant)DATE:
                August 18, 2006
            By:
                 /s/ JONATHAN V. DIAMONDJonathan
                V. DiamondChief
                Executive OfficerDATE:
                August 18, 2006
            By:
                /s/ ROBERT N. WEINGARTENRobert
                N. WeingartenChief
                Financial Officer





34





**INDEX
      TO EXHIBITS**





31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





35